Q2 2026 ARMOUR Residential REIT Inc Earnings Call
Speaker #1: All participants. Missing star, then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1, on your telephone keypad.
Speaker #1: To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO.
Speaker #1: Please go ahead, sir.
Speaker #2: Good morning. And welcome to ARMOUR Residential REIT, second quarter, 2026 conference call. This morning I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officers, Sergey Losyev and Desmond Macaulay.
Speaker #2: now I'd like to turn the call over to Gordon to run through the financial results.
Speaker #3: Thank you, Scott. By now everyone has access to ARMOUR's earnings release, and our Q2 2026 investor presentation, which can be found on ARMOUR's website, at www.armorereit.com.
Speaker #3: This conference call includes forward-looking statements, which are intended to be subject to the safeguarding section. Provided by the Private Securities Litigation Reform Act of 1995.
Speaker #3: The risk factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission describes certain factors beyond ARMOUR's control, that could cause actual results to differ materially, from those expressed in or implied by these forward-looking statements.
Speaker #1: Good morning, and welcome to ARMOUR Residential REIT's Q2 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad.
Speaker #3: Those periodic reports can be found on the SEC's website, at www.sec.gov. All of today's forward-looking statements are subject to change without notice, with disclaim any obligation to update them unless required by law.
Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.
Speaker #3: Also, today's discussions refer to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's websites shortly, and we'll continue for one year.
Speaker #1: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, CEO.
Speaker #1: Please go ahead, sir.
Speaker #2: Good morning. And welcome to ARMOUR Residential REIT's Q2 2026 conference call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officers, Sergey Losyev and Desmond Macauley.
Speaker #3: Our portfolio benefited from MBS spreads tightening. We delivered strong results for the quarter, with total economic return of 4.8%. ARMOUR's Q2 GAAP net income available to common stockholders, was $111.5 million, or 86 cents, per comp share.
Speaker #2: Now I'd like to turn the call over to Gordon to run through the financial results.
Speaker #3: Net interest income was $76.8 million. Distributed earnings available to common stockholders was $93.2 million, or 72 cents, per comp share. This non-GAAP measure is defined as net interest income, plus TBA drop income, adjusted for income or expense on our interest rate swaps and futures contracts, minus operating expenses.
Speaker #3: Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, and our Q2 2026 investor presentation, which can be found on ARMOUR's website, at www.armourreit.com.
Speaker #3: This conference call includes forward-looking statements, which are intended to be subject to the Safe Harbor Protection, provided by the Private Securities Litigation Reform Act of 1995.
Speaker #3: During Q2, ARMOUR raised approximately $218.7 million of capital by issuing approximately $12.7 million shares of common stock, and $4.1 million of capital by issuing approximately $198,000 shares, a preferred stock through our at-the-market offering programs.
Speaker #3: The risk factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission describes certain factors beyond ARMOUR's control, that could cause actual results to differ materially, from those expressed in or implied by these forward-looking statements.
Speaker #3: Those periodic reports can be found on the SEC's website, at www.sec.gov. All of today's forward-looking statements are subject to change without notice, with a disclaimer: any obligation to update them unless required by law.
Speaker #3: Through July 14, 2026, we raised approximately $88.3 million of capital, by issuing $5.2 million shares of common stock, through our common at common stock at-the-market offering program.
Speaker #3: ARMOUR paid monthly common stock dividends of 24 cents per common share per month, for a total of $72 cents per quarter. We aim to pay an attractive dividend that is appropriate in context, and stable over the medium term.
Speaker #3: Also, today's discussions refer to certain non-GAAP measures. These measures are reconciled as comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's websites shortly and will continue for one year.
Speaker #3: On July 30, a cash dividend of 24 cents per outstanding common share will be paid to the holders of record. On July 15, 2026.
Speaker #3: Our portfolio benefited from MBS spreads tightening. We delivered strong results for the quarter, with total economic return of 4.8%. ARMOUR's Q2 GAAP net income available to common stockholders was $111.5 million, or $86 per comp share.
Speaker #3: We have also declared cash dividends of 24 cents per outstanding common share, payable August 28, 2026, to the holders of record on August 17, 2026.
Speaker #3: Quarter-end book value was $17.53 per common share, up 0.6% from March 31, 2026. Our estimated book value as of Monday, July 20, was $17 per common share, with refractory accrual of the July common dividend of $24 cents per share.
Speaker #3: Net interest income was $76.8 million. Distributor earnings available to common stockholders was $93.2 million, or $72 per comp share. This non-GAAP measure is defined as net interest income plus TBA drop income, adjusted for income or expense on our interest rate swaps and futures contracts, minus operating expenses.
Speaker #3: I will now turn the call over to Chief Executive Officer, Officer Scott Ulm, to discuss ARMOUR's portfolio position and current strategy.
Speaker #3: During Q2, ARMOUR raised approximately $218.7 million of capital by issuing approximately $12.7 million shares of common stock and $4.1 million of capital by issuing approximately $198,000 shares, a preferred stock through our at-the-market offering programs.
Speaker #2: Thanks, Gordon. Agency MBS delivered a positive second quarter performance despite a macroeconomic backdrop that would normally weigh on the. The U.S. Treasury curve continued to bear flattened, with the 2-year yield rising 38 basis points compared with a 15 basis point increase in the 10-year yield.
Speaker #3: Through July 14, 2026, we raised approximately $88.3 million of capital by issuing $5.2 million shares of common stock through our common stock at-the-market offering program.
Speaker #2: While geopolitical uncertainty in the Middle East remained elevated, strong economic data and an energy-driven rise in headline inflation exposed divisions within the Federal Reserve, and led markets to shift from, pricing year-end rate cuts to rate hikes.
Speaker #3: ARMOUR paid monthly common stock dividends of $0.24 per common share per month for a total of $72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term.
Speaker #2: Under Chairman Walsh's new leadership, with traditional forward guidance receding and the Fed's broader policy framework under review, a less predictable central bank could push interest rate volatility higher.
Speaker #3: On July 30, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record. On July 15, 2026. We have also declared cash dividends of $0.24 per outstanding common share, payable August 28, 2026, to the holders of record on August 17, 2026.
Speaker #2: Historically, this combination of elevated uncertainty and a flatter yield curve has produced a meaningful headwind for mortgages. Even so, mortgage option adjusted spreads tightened 7 basis points across ARMOUR's asset classes.
Speaker #3: Quarter-end book value was $17.53 per common share, up 0.6% from March 31, 2026. Our estimated book value as of Monday, July 20, was $17 per common share, with refractory accrual of the July common dividend of $0.24 per share.
Speaker #2: Helping deliver a positive book value gain in the second quarter. Second quarter has reinforced an important point: market supply-demand dynamics are currently exerting greater influence on agency MBS valuations than the broader macroeconomic narrative.
Speaker #3: I will now turn the call over to Chief Executive Officer Officer Scott Ulm to discuss ARMOUR's portfolio position and current strategy.
Speaker #2: Looking ahead, the technical backdrop remains supportive into the third quarter. Elevated mortgage rates are constraining new loan production as net issuance of Fannie Mae and Freddie Mac securities continues to run negative this year.
Speaker #2: Thanks, Gordon. Agency MBS delivered a positive Q2 performance despite a macroeconomic backdrop that would normally weigh on the sector. The U.S. Treasury curve continued to bear flattened, with the two-year yield rising 38 basis points compared with a 15 basis point increase in the 10-year yield.
Speaker #2: On the demand side, strong inflows into bond funds from domestic and international investors continue to support agency MBS. Which remain as an attractive alternative to tightly valued corporate credit.
Speaker #2: While geopolitical uncertainty in the Middle East remained elevated, strong economic data and an energy-driven rise in headline inflation exposed a vision within the Federal Reserve and led markets to shift from pricing year-end rate cuts to rate hikes.
Speaker #2: The modest contraction in the GSE's retained portfolios in May was not surprising, given less compelling valuations than in March. When they added nearly $20 billion of mortgages.
Speaker #2: Even so, the pullback contrasted with the broader strength of investor demand. With more than $100 billion of capacity, remaining under their regulatory cap, we continue to view Fannie Mae and Freddie Mac as potential backstop buyers at wider spreads, helping support a stable spread environment.
Speaker #2: Under Chairman Walsh's new leadership, with traditional forward guidance receding, and the Fed's broader policy framework.
Speaker #2: Heading into the third quarter, mortgage spreads are modestly wider, but still just inside of their long and short-term averages. While favorable market technicals are expected to provide a range-bound environment through the summer, we remain mindful of forces outside our market that could threaten to disrupt this stability.
Speaker #2: Firmer inflation, a more hawkish Fed, and a sustained rise in volatility could prompt investors to demand greater compensation for mortgage risk, pushing spreads and yields wider.
Speaker #2: These risks warrant discipline at current valuations until markets have a better understanding of the Fed's reaction function in response to shifting macroeconomic factors. I'll now turn it over to Desmond for more detail on our portfolio.
Speaker #2: Desmond?
Speaker #4: Thank you, Scott. ARMOUR's end second quarter net balance sheet duration registered at near zero, reflecting our more neutral view on interest rates and the shape of the yield curve, then in prior quarters.
Speaker #1: It is an attractive alternative to tightly valued corporate credit. The modest contraction in the GSE retained portfolios in May was not surprising, given less compelling valuations than in March.
Speaker #1: When they added nearly $20 billion in mortgages, even so, the pullback contrasted with the broader strength of investor demand. With more than $100 billion of capacity, remaining under their regulatory cap, we continue to view Fannie Mae and Freddie Mac as potential backstop buyers in wider spreads, helping support a stable spread environment.
Speaker #4: The remaining positive bias, incorporates our expectation that the Federal Reserve will remain on hold through the fall, as signs of cooling economic activity and inflation have emerged in recent weeks.
Speaker #4: Our implied leverage excluding Treasury holdings was around 7.5 turns, a modestly lighter level to reflect some caution while allowing the portfolio to continue to benefit from carry, in an environment where volatility remains subdued.
Speaker #1: Heading into the third quarter, mortgage spreads are modestly wider but still just inside their long- and short-term averages. While favorable market technicals are expected to provide a range-bound environment through the summer, we remain mindful of forces outside our market that could threaten to disrupt this stability.
Speaker #4: Our expected July month-end liquidity position, including monthly paydowns, remains strong. At over $1.2 billion, or nearly 50% of total equity, ARMOUR's asset portfolio remains 100% agency MBS, agency CMBS, and U.S.
Speaker #1: Firmer inflation, more hawkish Fed, and a sustained rise in volatility could prompt investors to demand greater compensation for mortgage risk, pushing spreads and yields wider.
Speaker #1: These risks warrant discipline at current valuations until markets have a better understanding of the Fed's reaction function in response to shifting macroeconomic factors. I'll now turn it over to Desmond for more detail on our portfolio.
Speaker #4: Treasuries. The portfolio size is over $22 billion, nudging a fifth consecutive quarter of growth in both our assets and capital base. Consistent with our balance sheet growth, we've net added nearly $1.3 billion of new mortgage assets, since ARMOUR's last conference call in April.
Speaker #1: Desmond?
Speaker #2: Thank you, Scott. ARMOUR's end-second quarter net balance sheet duration registered at near zero reflecting our more neutral view on interest rates and the shape of the yield curve than in prior quarters.
Speaker #4: Our purchase mix has been concentrated in power and slide premium coupons, that benefit from a slower prepayment environment, overlaid with positive convexity and near bullet-like structure of 5-year and 10-year DOS bonds.
Speaker #2: The remaining positive bias incorporates our expectation that the Federal Reserve will remain on hold through the fall, as signs of cooling economic activity and inflation have emerged in recent weeks.
Speaker #4: The portfolio remains concentrated in specified pools, with favorable prepayment characteristics, which represent over 95% of ARMOUR's MBS holdings.
Speaker #2: Our implied leverage excluding Treasury holdings was around 7.5 turns, a modestly lighter level to reflect some caution while allowing the portfolio to continue to benefit from carry in an environment where volatility remains subdued.
Speaker #3: Q2's aggregate portfolio prepayments average $11.4 CPR, just above the first quarter average of $11.2 CPR. Recent prepayment speeds have since declined meaningfully, falling to 8.8 CPR in the July report, and we expect speeds to persist around these levels in the current rate environment.
Speaker #2: Our expected July month-end liquidity position, including monthly paydowns, remains strong. At over $1.2 billion, or nearly 50% of total equity, ARMOUR's asset portfolio remains 100% agency MBS, agency CMBS, and U.S.
Speaker #3: Our hedging strategy is designed to reduce duration risk across the yield curve, using both long and short hedge instruments, to protect against sharp rallies and sell-offs.
Speaker #2: Treasuries. The portfolio size is over $22 billion, nudging a fifth consecutive quarter of growth in both our assets and capital base. Consistent with our balance sheet growth, we've net added nearly $1.3 billion of new mortgage assets since ARMOUR's last conference call in April.
Speaker #3: About 86% of ARMOUR's hedges are OIS and SOFRA pay-fix swaps. We continue to favor swaps in shorter and intermediate maturities, where spread volatility is lower.
Speaker #2: Our purchase mix has been concentrated in part and slight premium coupons that benefit from a slower prepayment environment, overlaid with positive convexity and near bullet-like structure of 5-year and 10-year DOS bonds.
Speaker #3: At longer maturities, where swap spreads sit closer to historical averages, we prefer a more balanced mix of swaps, Treasury futures, and Treasury shorts.
Speaker #4: Although the Fed has reduced its Treasury bill purchases to $10 billion a month, Ripple spreads to SOFRA remain tight, providing stable funding for the portfolio.
Speaker #2: The portfolio remains concentrated in specified pools with favorable prepayment characteristics, which represent over 95% of ARMOUR's MBS holdings. Q2's aggregate portfolio prepayments averaged 11.4 CPR, just above the first quarter average of 11.2 CPR.
Speaker #4: With some probability of rate increases now embedded in the front end of the SOFRA curve, term funding carries a larger premium, making shorter dated and overnight financing through buckler our broker-dealer affiliate more attractive proposition.
Speaker #2: Recent prepayments peaks have since declined meaningfully, falling to $8.8 CPR in the July report, and we expect peaks to persist around these levels in the current rate environment.
Speaker #4: Our base case remains that the Fed stays on hold, which allows current Ripple conditions to persist. While Fed share wash has moved quickly to establish policy task forces, we do not expect balance sheet proposals disruptive to the Ripple or agency MBS markets, particularly as we approach midterm elections.
Speaker #2: Our hedging strategy is designed to reduce duration risk across the yield curve, using both long and short hedge instruments, to protect against sharp rallies and sell-offs.
Speaker #2: About 86% of ARMOUR's hedges are OIS and SOFRA pay-fixed swaps. We continue to favor swaps in shorter and intermediate maturities, where spread volatility is lower. At longer maturities, where swap spreads sit closer to historical averages, we prefer a more balanced mix of swaps, Treasury futures, and Treasury shorts.
Speaker #4: Back to you, Scott.
Speaker #2: Thanks, Desmond. Accompanying delivered strong results for the second quarter of 2026, with total economic return of 4.8%, despite a macroeconomic background that normally weigh on our sector.
Speaker #2: We continue to prioritize maintaining common share dividends appropriate for the intermediate term, rather than focusing on short-term market fluctuations. Our reproach, our approach remains unchanged.
Speaker #2: Although the Fed has reduced its Treasury bill purchases to $10 billion a month, repo spreads to SOFR remain tight, providing stable funding for the portfolio.
Speaker #2: We stress-test our liquidity, apply systematic hedging, and deploy capital appropriately. We're well-positioned to attenuate downside risk while taking advantage of opportunities that present themselves.
Speaker #2: With some probability of rate increases now embedded in the front end of the SOFR curve, term funding carries a larger premium, making shorter-dated and overnight financing through Buckler, our broker-dealer affiliate, a more attractive proposition.
Speaker #2: Thank you for joining today's call, and for your continued interest in ARMOUR. We would now like to open up for any questions.
Speaker #1: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.
Speaker #2: Our base case remains that the Fed stays on hold, which allows current repo conditions to persist. While Fed share wash has moved quickly to establish policy task forces, we do not expect balance sheet proposals disruptive to the repo or agency MBS markets, particularly as we approach midterm elections.
Speaker #1: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker #1: The first question comes from Doug Harter with BTIG. Please go ahead.
Speaker #2: Back to you, Scott.
Speaker #1: Thanks, Desmond. The company delivered strong results for the second quarter of 2026, with total economic return of 4.8%, despite a macroeconomic background that normally weighs on our sector.
Speaker #5: I good morning. Scott, hoping you could talk about your outlook for capital raising. You know, kind of tie that to your comments that, you know, on the one hand you expect kind of range-bound spreads, but kind of mindful of risks.
Speaker #1: We continue to prioritize maintaining common share dividends appropriate for the intermediate term, rather than focusing on short-term market fluctuations. Our approach remains unchanged. We stress-test our liquidity, apply systematic hedging, and deploy capital appropriately.
Speaker #5: So if you could just kind of tie all that together and how you're thinking about capital raising.
Speaker #2: Yeah, you know, the, you know, the way we've always approached capital is, you know, to, to, to, to look at, look at what we can do with it and what the opportunities are.
Speaker #1: We are well positioned to attenuate downside risks while taking advantage of opportunities that present themselves. Thank you for joining today's call and for your continued interest in ARMOUR.
Speaker #2: And so, you know, so we, we continue along that course. You know, we're also mindful that, you know, raising capital lowers our costs. You know, we, you know, we're able to, to spread costs, obviously, over, over a much larger a much larger capital base.
Speaker #1: We would now like to open up for any questions.
Speaker #3: We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.
Speaker #2: And, and we also, you know, as you, as you know, our marginal fee is $75 basis points, so, you know, we, we, we lower our costs on average with every with all the with any capital we raise.
Speaker #3: If at any time your question has been addressed and you would like to withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.
Speaker #2: So, you know, look, we, you know, we look at, we look at all those factors. And tie them together and figure out what the opportunity set is in the market, and then figure out how we're going to execute on it.
Speaker #3: The first question comes from Doug Harter with BTIG. Please go ahead.
Speaker #5: Okay, that makes sense. And can you talk about what where what you're seeing in terms of incremental returns as you kind of raise and deploy capital?
Speaker #4: Good morning. Scott, hoping you could talk about your outlook for capital raising and kind of tie that to your comments. On the one hand, you expect kind of range-bound spreads, but you're also mindful of the risks. So, if you could just tie all that together and explain how you're thinking about capital raising.
Speaker #5: In today's market?
Speaker #2: Yeah. You know, Desmond, Sergey, you know, why don't you why don't you run through the, the, the investment horizon here for us?
Speaker #3: Yeah, sure. Hi, Doug. So we see static returns in the mid-teens for, say, 30-year 5s to 6s. Where we've been adding most of our reinvestments of late.
Speaker #1: Yeah. The way we've always approached capital is to look at what we can do with it and what the opportunities are. And so we continue along that course.
Speaker #3: And this is assuming about 8 tons of leverage and hedge to half a year duration, with swaps. Now, if spreads were to tighten by, say, 10 basis points in OIS, that could add another 4 to 5%.
Speaker #1: We're also mindful that raising capital lowers our costs. We're able to spread costs, obviously, over a much larger capital base. And we also as you know, our marginal fee is $75 basis points, so we lower our costs on average with any capital we raise.
Speaker #3: That would accrue into our total return through book value. We are not penciling that in at this time. Given that we expect spreads to stay range-bound near term, but we are constructive on the market longer term.
Speaker #1: So, look, we look at all those factors, tie them together, and figure out what the opportunity set is in the market, and then figure out how we're going to execute on it.
Speaker #5: Okay, that makes sense, Desmond. Thank you very much.
Speaker #1: Thank you. The next question comes from Marissa Lobo with UBS. Please go ahead.
Speaker #4: Okay. That makes sense. And can you talk about what you're seeing in terms of incremental returns as you kind of raise and deploy capital?
Speaker #6: Good morning, and thank you. Could you speak to just how you're thinking about specified pools versus TBAs today? Has the relative value of prepayment protection changed given, given current dollar roll economics?
Speaker #4: In today's market.
Speaker #1: Yeah, yeah, Desmond. Sergey, why don't you run through the investment horizon here for us?
Speaker #2: Yeah, sure. Hi, Doug. So we see static returns in the mid-teens for, say, 3.0s or 5s to 6s, where we've been adding most of our reinvestments of late.
Speaker #4: Yes, good morning, Marissa. This is Sergey. Yeah, so we view specified pools as probably a fully valued here versus TBAs. Some specialness has come back into TBA market, but has been still quite volatile.
Speaker #2: And this is assuming about 8 times of leverage and hedged to a half-year duration with swaps. Now, if spreads were to tighten by, say, 10 basis points in OIS, that could add another 4 to 5 percent that would accrue into our total return through book value.
Speaker #4: So, you know, we, we look to buy assets into the portfolio over the longer term. So we would even, even being kind of fully valued versus the financing implied financing on TBAs, we view, you know, finding good convexity collateral you know, still additive to the portfolio to book value over the long term.
Speaker #2: We are not penciling that in at this time, given that we expect spreads to stay range-bound near term. But we are constructive on the market longer term.
Speaker #4: We still focus on credits you know, lower loan balance stories, but we play mostly in the, you know, most liquid section of specified market kind of under under a 32 ticks or, or so.
Speaker #4: Okay, that makes sense, Desmond. Thank you very much.
Speaker #4: So that, that allows us to continue to grow the asset book from a specified pool standpoint, but we've also increased size in TBA positions as well, since last quarter, but they remain more of a tactical play rather than you know, alternative to, to specified pools.
Speaker #3: Thank you. The next question comes from Marissa Lobo with UBS. Please go ahead.
Speaker #5: Good morning, and thank you. Could you speak to just how you're thinking about specified pools versus TBAs today? Has the relative value of prepayment protection changed given current dollar roll economics?
Speaker #6: Okay, thank you. And, and just thinking about supply-demand in, in the market, you know, it's been talked about money managers seeing relative value. NBS versus versus corporates.
Speaker #2: Yes. Good morning, Marissa. This is Sergey. Yeah, so we view specified pools as probably fully valued here versus TBAs. Some specialness has come back into the TBA market, but it's still been quite volatile.
Speaker #6: Are you still seeing continued inflows at these levels, or, or are valuations reaching a point where, where you see demand beginning to moderate?
Speaker #2: So we look to buy assets into the portfolio over the longer term. So we would even being kind of fully valued versus the financing implied financing on TBAs, we view finding good convexity collateral still additive to the portfolio to book value over the long term.
Speaker #4: Yeah, so we are still seeing you know, both foreign and domestic inflows into bond funds. Now, like you said, a lot of those inflows are coming into the corporate sector.
Speaker #4: But just the even on the margin, we continue to see that in the mortgage funds and ETFs. Having said that, you know, we are seeing signs of demand cooling a bit this quarter.
Speaker #2: We still focus on credits—lower loan balance stories—but we play mostly in the most liquid section of the specified market, kind of under 32 ticks or so.
Speaker #4: Obviously, we had the GSEs report their first net decline in their retained portfolios. And the overall picture you know, signals that investors may be waiting to see what the Fed's reaction function to shifting macroeconomic picture will be.
Speaker #2: So that allows us to continue to grow the asset book from specified pool standpoint, but we've also increased size in TBA positions as well since last quarter, but they remain more of a tactical play rather than alternative to specified pools.
Speaker #4: Having said that, you know, given how low supply has been. The projections continue to decline since you know, beginning of the year. You know, we feel like this strong technical picture will remain.
Speaker #5: Okay. Thank you. And just thinking about supply-demand in the market, it's been talked about money managers seeing relative value for MBS versus corporates. Are you still seeing continued inflows at these levels, or are valuations reaching a point where you see demand beginning to moderate?
Speaker #4: It's just really the some of the mindfulness is around the outside forces to the mortgage market, in particularly you know, Fed monetary policy.
Speaker #6: Okay, great. Thank you for the answers.
Speaker #1: Thank you. The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.
Speaker #2: Yeah. So we are still seeing both foreign and domestic inflows into bond funds. Now, like you said, a lot of those inflows are coming into the corporate sector, but even on the margin, we continue to see that in the mortgage funds and ETFs.
Speaker #5: All right, thanks. Good morning. It looks like on the, the hedge side of things, increased a decent amount this quarter. And your net duration position declined a little bit.
Speaker #2: Having said that, we are seeing signs of demand cooling a bit this quarter. Obviously, we had the GSEs report their first net decline in their retained portfolios.
Speaker #5: Can you guys talk about kind of generally how you're approaching your, your rate hedging given the flattening of the yield curve? And if the, you know, potential for Fed hikes coming up later.
Speaker #5: Year has any impact on the choice of using swap versus treasury hedges? Thanks.
Speaker #2: And the overall picture signals that investors may be waiting to see what the Fed's reaction function to the shifting macroeconomic picture will be. Having said that, given how low supply has been—and projections continue to decline since the beginning of the year—we feel like this strong technical picture will remain. It's just really that some of the mindfulness is around the outside forces to the mortgage market, in particular Fed monetary policy.
Speaker #3: Yes, hi, Trevor. So as we mentioned in our prepared remarks, our net balance sheet duration ending the quarter was close to zero. We look to maintain a flat profile both in duration and the shape of the curve.
Speaker #3: On the back end, we're we, we look at we look for that to be roughly flat. And on the front end, there's a slight positive bias there.
Speaker #5: Okay. Great. Thank you for the answers.
Speaker #3: Thank you, the next question comes from Trevor Cranston with Citizens JMP. Please go ahead.
Speaker #3: And that's because we think that the Fed could stay on hold for longer and market pricing at this point is is for hikes to take place at the end of this by the end of this year and over the over next year as well.
Speaker #4: All right, thanks. Good morning. It looks like, on the hedge side of things, the swap portfolio notional increased a decent amount this quarter, and your net duration position declined a little bit.
Speaker #3: In terms of our hedge, our swaps versus treasuries, it's really about what our view there on is on swap spreads, currently we we favor adding swaps in the front end of the curve.
Speaker #4: Can you guys talk about, kind of generally, how you're approaching your rate hedging given the flattening of the yield curve? And if the potential for Fed hikes coming up later this year has any impact on the choice of using swap versus Treasury hedges?
Speaker #3: There's less spread volatility there. Up to like the five-year point. And we look for a more balanced mix when it comes to the longer duration instruments.
Speaker #4: Thanks.
Speaker #2: Yes. Hi, Trevor. As we mentioned in our prepared remarks, our net balance sheet duration at the end of the quarter was close to zero. We look to maintain a flat profile, both in duration and in the shape of the curve.
Speaker #3: So we use both treasuries, treasury futures, and and swaps in the longer end of the curve. Now, from our perspective, though, it's really more if we see inflation normalize, we may actually be looking to increase our position in duration and position more for both deepener.
Speaker #2: On the back end, we're look for that to be roughly flat. And on the front end, there's a slight positive bias there. And that's because we think that the Fed could stay on hold for longer and market pricing at this point is for hikes to take place at the end of this by the end of this year and over next year as well.
Speaker #3: But you know, we're, we're not there yet. Obviously, we're seeing oil prices are higher, so there's yes, there is a tail risk that that the Fed could hike if oil prices stay on a more sustained period at a very high level, then that could flow over to headline inflation.
Speaker #3: But our view here is more along the lines of looking to see whether we might even add to our duration positioning if we see inflation normalize.
Speaker #2: In terms of our hedge, our swaps versus Treasuries, it's really about what our view there is on swap spreads. Currently, we favor adding swaps in the front end of the curve.
Speaker #5: Got it. Okay, that makes sense. Thank you.
Speaker #2: There's less spread volatility there, up to about the five-year point. And we look for a more balanced mix when it comes to the longer-duration instruments.
Speaker #1: Thank you. The next question comes from Jason Weaver with Jones Trading. Please go ahead.
Speaker #7: Hey, guys, good morning. I was wondering, can you talk a little bit about the new CMB how the new CMBS position complements the portfolio?
Speaker #2: So we use both treasuries, treasury futures, and swaps in the longer end of the curve. Now, from our perspective, though, it's really more if we see inflation normalize, we may actually be looking to increase our position in duration and position more.
Speaker #7: And if you expect that to grow materially ahead in proportion?
Speaker #3: Yes. So you know, currently we feel like it's an appropriate position given where we see the valuations. It's very similar. We look at mortgage spreads.
Speaker #3: Your opportunistically having said that, you know, we began rotating out of the some of the five-year pools in the CMBS position out to the 10-year where, you know, negative swap spreads allow for, you know, pick and carry as well as a better convexity profile versus some of the other mortgages we own.
Speaker #2: Both deepener. But we're not there yet. Obviously, we're seeing oil prices are higher, so yes, there is a tail risk that the Fed could hike if oil prices stay on a more sustained period at a very high level, then that could flow over to headline inflation.
Speaker #3: So that really serves two things. Number one, it helps our portfolio optimization from the negative convexity side. And number two, it allows us to have a more targeted approach to where we want to be longer on the yield curve, how we want to hedge.
Speaker #2: But our view here is more along the lines of looking to see whether we might even add to our duration positioning if we see inflation normalize.
Speaker #3: And how we want to kind of provide a substitute to some of the more expensive specified pools by using the CMBS position.
Speaker #4: Got it. Okay. That makes sense. Thank you.
Speaker #3: Thank you, the next question comes from Jason Weaver with Jones Trading. Please go ahead.
Speaker #7: Got it. Thank you. And then just talking about the the migration upward in coupon, can you talk about specific call protection on those fives and sixes?
Speaker #6: Hey, guys. Good morning. I was wondering, can you talk a little bit about the new CMBS—how the new CMBS position complements the portfolio?
Speaker #7: Amid some of the softer economic data we've seen the last couple weeks?
Speaker #6: And do you expect that to grow materially, going forward? In proportion?
Speaker #3: Yeah, so you know, like you pointed out, certainly the last few prints both on labor and inflation data have been a little bit more favorable to what the Fed's looking for.
Speaker #2: Yes. So currently, we feel like it's an appropriate position given where we see the valuations. It's very similar to how we look at mortgage spreads.
Speaker #2: Your opportunistically having said that, we began rotating out of the some of the five-year pools in the CMBS position out to the 10-year where negative swap spreads allow for pick and carry as well as the better convexity profile versus some of the other mortgages we own.
Speaker #3: At the same time, you know, we're seeing real-time oil prices continue to increase. So we have to be prepared for both scenarios. And that's why we continue to look at both loan balance, something that's maybe over 300K size, as well as relative value stories in credit, geo story.
Speaker #2: So that really serves two things. Number one, it helps our portfolio optimization from the negative convexity side. And number two, it allows us to have a more targeted approach to where we want to be longer on the yield curve, how we want to hedge.
Speaker #3: So we're starting to look at that seasoning a little bit. So everything's on the table. We want to protect the portfolio convexity from both sides of the the rate move.
Speaker #3: And really just kind of try to avoid the more generic paper that has very high average loan sizes and we know the propensity of technology and servicer capacity have grown.
Speaker #2: And how we want to kind of provide a substitute to some of the more expensive specified pools by using the CMBS position.
Speaker #3: So yeah, any any rate move could continue to worsen the deliverability of more generic TBA-like pools.
Speaker #6: Got it. Thank you. And then just talking about the migration upward in coupon, can you talk about specific call protection on those fives and sixes?
Speaker #7: All right, thanks for the color, guys.
Speaker #6: Amid some of the softer economic data we've seen the last couple of weeks?
Speaker #1: Thank you. Again, if you have a question, please press star then one. The next question comes from Dave Storms with Stonegate Capital. Please go ahead.
Speaker #2: Yeah. So you pointed out, certainly the last few prints—both on labor and inflation data—have been a little bit more favorable to what the Fed's looking for.
Speaker #8: Good morning. Thank you for taking my question. Just want to circle back. You mentioned earlier that inflation normalization. Would maybe cause you to increase duration.
Speaker #2: At the same time, we're seeing real-time oil prices continue to increase, so we have to be prepared for both scenarios. That's why we continue to look at both loan balances—something that's maybe over $300K in size—as well as relative value stories in credit, and the geo story.
Speaker #8: Would you also consider levering up back up in this situation? Maybe set a different way. How are you thinking about your leverage position right now?
Speaker #3: Yes, hi Dave. So yeah, know both factors that actually go into into how we set our leverage targets. First, first we have to look at spreads.
Speaker #2: So we're starting to look at a seasoning a little bit. So everything's on the table. We want to protect the portfolio convexity from both sides of the rate move.
Speaker #3: And think what our view is on spreads. The macroeconomic environment, even you know, that includes what's going on in geopolitically as well. And our liquidity.
Speaker #2: And really, just kind of try to avoid the more generic paper that has very high average loan sizes. And we know the propensity of technology and servicer capacity have grown.
Speaker #3: And not just our current liquidity, but we stress test our liquidity to ensure that it can withstand extremes scenarios. So that all plays into it.
Speaker #2: So any rate move could continue to worsen the deliverability of more generic TBA-like pools.
Speaker #6: All right. Thanks for the color, guys.
Speaker #3: In terms of whether we could increase our leverage, so yeah, so if spreads spreads could widen for example, if we think it's a temporary bout of volatility, then that may cause us to increase our leverage with the view here that if the Fed stays on hold for longer, then then that volatility will decline.
Speaker #3: Thank you. Again, if you have a question, please press star then one. The next question comes from Dave Storms with Stonegate Capital. Please go ahead.
Speaker #5: Good morning. Thank you for taking my question. Just want to circle back. You mentioned earlier that inflation normalization would maybe cause you to increase duration.
Speaker #3: Subsequently, and spreads will tighten again. So that that could be a scenario there. But right now we are comfortable with where our leverage is cognizant of of the current risks in the market and Fed's reaction function that we still need to get better understanding of, which we will over time.
Speaker #5: Would you also consider levering up, back up, in this situation? Maybe said a different way: How are you thinking about your leverage position right now?
Speaker #2: Yes. Hi, Dave. So, yeah, there are a number of factors that actually go into how we set our leverage targets. First, we have to look at spreads.
Speaker #2: And think about what our view is on spreads, the macroeconomic environment, and even what's going on geopolitically as well. And our liquidity—not just our current liquidity, but we stress test our liquidity to ensure that it can withstand extreme scenarios.
Speaker #8: That's perfect. I appreciate that. If I could just ask one follow-up on that. With your current liquidity profile, I see as a percent of common equity, it's up a little bit.
Speaker #8: Year over year, but it's kind of been on a downtrend for the last couple quarters. Are you comfortable with your liquidity as a percent of total equity, or is this something you might focus on in in the short term?
Speaker #3: We are comfortable with our liquidity. As I mentioned, we we stress test it over, you know, some extreme scenarios. We did add some longer duration hedges and they have their haircut percentages are higher.
Speaker #2: So that all plays into it. In terms of whether we could increase our leverage, so yeah, so if spreads could widen, for example, if we think it's a temporary bout of volatility, then that may cause us to increase our leverage with the view here that if the Fed stays on hold for longer, then that volatility will decline.
Speaker #3: That's part of the reason why our liquidity is lower. But with that, we're still very comfortable with where we are.
Speaker #2: Subsequently, spreads will tighten again, so that could be a scenario there. But right now, we are comfortable with where our leverage is, cognizant of the current risks in the market and the Fed's reaction function, which we still need to get a better understanding of—something we will gain over time.
Speaker #8: Understood. Thank you for taking my questions.
Speaker #1: Thank you. The next question comes from Timothy Dagostino with B Reilly Securities. Please go ahead.
Speaker #5: Yeah, hi. Thank you and good morning. Just a quick question for me. On raising capital, you know, looking at the press release, you you talk about raising 200 and about 19 million dollars through your common stock ATM versus about 4 million on your preferred ATM.
Speaker #5: That's perfect. I appreciate that. If I could just ask one follow-up on that: With your current liquidity profile, I see, as a percent of common equity, it's up a little bit.
Speaker #5: I guess, could you just provide a little color on why you prefer you know, like the common stock ATM compared to the the preferred?
Speaker #5: Year over year, but it's kind of been on a downtrend for the last couple of quarters. Are you comfortable with your liquidity as a percent of total equity, or is this something you might focus on in the short term?
Speaker #5: Just trying to understand the rationale and you know, how you think about both both programs. Thank you.
Speaker #3: Well, it's price. And you know, preferred has been it's been trading at a at. At at a strip yield that that that's still pretty attractive, but it's volume volume is is relatively low in that.
Speaker #2: We are comfortable with our liquidity. As I mentioned, we stress test it over some extreme scenarios. We did add some longer duration hedges and they have their haircut percentages are higher.
Speaker #3: And it's the existing issue that we're adding to is not not particularly big though. You know, we certainly have room for more preferred, but you know, we we got to see prices prices that would that would that we like.
Speaker #2: So that's part of the reason why our liquidity is lower. But with that, we're still very comfortable with where we are.
Speaker #3: So you know, that's that that is really it. You know, the you know, obviously the the volumes are vastly higher on the on the common side of things.
Speaker #5: Understood. Thank you for taking my questions.
Speaker #3: And you know, despite the you know, the the the attractive accretion for common shareholders of preferred issuance, we just have to be have to see see see prices that we like.
Speaker #3: Thank you. The next question comes from Timothy D'Agostino with B. Reilly Securities. Please go ahead.
Speaker #4: Yeah. Hi. Thank you and good morning. Just a quick question for me. On raising capital, looking at the press release, you talk about raising 200 and about 19 million dollars through your common stock ATM versus about 4 million on your preferred ATM.
Speaker #3: And whether that you know, whether that is you know, adding to our existing you know, or or or someday a new issue, but we haven't seen the real opportunities in volume there that we we'd love to see.
Speaker #4: I guess, could you just provide a little color on why you prefer the common stock ATM compared to the preferred? Just trying to understand the rationale and how you think about both programs.
Speaker #3: And I think we we remain pretty convinced that the preferred is a compelling a compelling value and credit story.
Speaker #5: Okay, great. Thank you so much. It's all from me.
Speaker #4: Thank you.
Speaker #2: Well, it's price. And preferred has been it's been trading at a strip yield that's still pretty attractive, but it's volume is relatively low in that.
Speaker #1: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.
Speaker #3: Thank you very much. We appreciate your interest in ARMOUR REIT. And feel free to give us a ring. If any follow-up questions occur, thanks so much.
Speaker #2: And it's the existing issue that we're adding to is not particularly big. We certainly have room for more preferred, but we got to see prices that we like.
Speaker #2: So that is really it. Obviously, the volumes are vastly higher on the common side of things. And despite the attractive accretion for common shareholders of preferred issuance, we just have to see prices that we like.
Speaker #2: And whether that is adding to our existing or someday a new issue, but we haven't seen the real opportunities in volume there that we'd love to see.
Speaker #2: And I think we remain pretty convinced that the preferred is a compelling value and credit story.
Speaker #4: Okay. Great. Thank you so much. It's all from me.
Speaker #3: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks.
Speaker #2: Thank you very much. We appreciate your interest in ARMOUR REIT, and feel free to give us a ring if any follow-up questions occur. Thanks so much.
